For small, fast-growing companies, dividends are an unaffordable luxury. But a handful of small businesses are finding ways to pay a dividend without compromising their growth, offering potential for solid gains with a slice of income on the side. Dividends are actually quite common in small-cap country. More than half of the companies in Standard & Poor’s Small-Cap 600 Stock Index pay dividends, and they yield an average 2.3%, slightly trailing the 2.4% yield of dividend payers in the S&P 500 (the full S&P 500, which includes companies that don’t pay dividends, yields 2.1%). Granted, most of these businesses aren’t likely to make the big leagues. Financial companies and industrials dominate the roster of small-capitalization stocks, so you’ll be hard-pressed to find the next Under Armour (symbol UA) on the list.
Companies that can pay dividends without much financial stress offer the most upside. These businesses tend to be solidly profitable, have a manageable amount of debt, and should be able to increase their dividends consistently, giving investors a raise each year. Keeping those factors in mind, we found four stocks and one exchange-traded fund that look compelling from both a growth and an income perspective: ABM Industries (ABM), City Holding (CHCO), Escalade (ESCA) and ProShares Russell 2000 Dividend Growers ETF (SMDV).